Sitting on sidelines shortchanges your retirement

Radu Razvan / Fotolia

Radu Razvan / Fotolia

Ryan ErmeyKiplinger's Personal Finance

A recent survey by Ally Bank found that 61 percent of Americans say that investing is scary, with millennials the most likely to report feeling intimidated. Millennials biggest fear: losing money on investments.

Why so much angst? Millennials are the generation that came of age during the worst financial crisis since the Great Depression. They watched markets implode and the economy follow suit, shrinking their post-college job options in the process.

As the bull market approaches its 10th year, they know another downturn is lurking somewhere.

But sitting on the sidelines is short-changing their futures, particularly their retirement. Every second millennials wait to take the leap, they're giving up one of their greatest assets as an investor: time.

"The further from retirement you are, the more time your assets have to recover from big losses," says Dave Nash, a certified financial planner in San Antonio. Generally, he says, that gives younger investors leeway to take a little more risk with their investments for a potentially bigger reward. And the earlier that happens, the more time there is for compound interest to work its magic.

Take a 27-year-old who starts contributing $100 per month toward retirement and earns a return of 8 percent per year. She would have $350,000 by age 67. Not bad, but had she started five years earlier, she would retire with nearly $530,000.

Even the unluckiest investor in the world investing in a broad stock market index fund at the very top of the market in October 2007 -- just before stocks measured by that index tumbled 55.3 percent -- would have recovered. If the investment was left untouched from then until now, the investor would have earned 7.6 percent per year, on average, on the initial investment, for a total gain of about 111 percent.

A quick-and-dirty calculation to keep in mind, says Nash, is the rule of 72. To find how long it will take your money to double, divide your portfolio's rate of return into 72. Even if you earn a conservative 6 percent, your money will double about every 12 years. Boost that to 10 percent (the average return for stock portfolios dating back to 1926), and you'll double your investment about every seven years.

Still, some on the sidelines might wonder if it's wiser to wait to invest until stock prices are lower. Sure, theoretically, but good luck guessing when that's going to happen.

"If it was easy to time the market and know which asset classes will outperform, then we'd all be millionaires," says Elaine Lee, a certified financial planner in Summit, N.J.

Investors are better off diversifying their dollars among various asset classes, such as stocks, bonds and cash, to ensure their eggs aren't all in one basket.